James Flanigan

Labor Pact, Not Tariffs, Key to Steel's Strength

When President Bush imposed tariffs on foreign steel a year and a half ago, things looked dire for one of America's most storied industries.

A worldwide economic slowdown had reduced demand for steel while increasing competition from low-cost imports; that left most U.S. producers hemorrhaging red ink. Venerable Bethlehem Steel found itself mired in bankruptcy, along with many smaller companies.

Since that time, a lot has changed. Lazarus-like, Bethlehem has been raised from the dead. Along with LTV Corp. and others, it has been folded into a new company called International Steel Group Inc.

International Steel, already the U.S. industry's second-largest player in terms of tonnage produced annually, was founded by Wall Street financier Wilbur Ross shortly after the tariffs were imposed. Almost immediately, his enterprise turned a profit.

So does this prove that the tariffs -- which now threaten to start a global trade war -- have been just the medicine U.S. steel producers needed to revive?

Hardly. Though Ross credits the tariffs with stabilizing steel markets, few doubt that the key to his early success has been the labor contract that the veteran investment banker hammered out with the United Steelworkers of America before agreeing to pick up Bethlehem. The pact is a landmark for the steel industry and could prove to be an example for other old-line sectors.

Under the contract, Bethlehem's payroll was cut from 11,500 to 8,600. Work rules -- job classifications that limit what each employee can do -- were sharply reduced from 30 to five.

Management took a hit too. Before, seven layers of supervisors stood between the shop floor and the front office. "We've cut that to three," Ross notes.

The pact that Ross negotiated features carrots, as well as sticks. The rank-and-file now participates in profit-sharing, and the union has a representative on the board of directors.

Perhaps most significant, International Steel is not burdened by the so-called legacy costs of retiree health benefits and unfunded pension liabilities that helped sink LTV and Bethlehem. The labor agreement relegates health benefits for retirees to a special fund whose financing is contingent on International Steel making a high profit. Meanwhile, $4.2 billion of Bethlehem's unfunded pension liabilities have been passed on to the federally backed Pension Benefit Guaranty Corp.

Thanks to the labor agreement, International Steel posted a $58-million operating profit for the first half of this year. The firm has registered with the Securities and Exchange Commission to sell shares to the public to pay down debt.

Ross, whose investment firm has put $400 million into International Steel, is happy with the progress so far. "We believe we have some of the most modern and well-maintained steel-making facilities in North America," he says.

The union seems happy too. "This contract is the beginning of the restructuring of the industry," Steelworkers spokesman Marco Trbovich says. The union has extended similar terms to some operations at U.S. Steel Corp. and may well do the same at Inland Steel, a unit of LNM Holdings.

Independent metals analyst Charles Bradford is not surprised at the comeback.

"The labor contract reduces the costs of the old Bethlehem operations by more than 30%," he says. "It has turned one of the least-efficient companies into one of the most competitive."

Still, he is chagrined at what might have been. If the union and management -- traditionally bitter adversaries -- had found a way to come together five years ago, "there would have been no bankruptcies in the industry, and companies would have been funding their pension liabilities," he says. What's more, "there would have been none of these tariffs on steel."

That is a sobering realization in the wake of last week's World Trade Organization ruling that the tariffs are illegal. Other countries are now threatening retaliation against $2.2 billion of U.S. exports -- including California citrus and other agricultural products.

President Bush responded last week that he was reviewing whether to yank the tariffs. Maybe a better idea is to send Wilbur Ross over to Europe and see what he can work out.